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Vivid Economics is an energy consultancy offering services in a suite of diverse disciplines, ranging from climate change and natural resources to industrial transformation and energy, international development, trade, urbanization, earth observation, and transaction support.On March 5th, 2021, Vivid Economics was acquired by McKinsey & Company. The terms of the transaction were not disclosed.

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Sectors are unevenly exposed in the net-zero transition

Jan 25, 2022

A net-zero transition could affect the world’s energy and land-use systems and, by extension, the economic sectors that participate in these systems. Using the Net Zero 2050 scenario developed by the Network for Greening the Financial System (NGFS) as a starting point, we look at what the decarbonization implications would be for each. We seek to measure the potential changes in demand and the necessary spending on physical assets to reach net-zero emissions, as well as the implications for costs and jobs. We also focus on the opportunities in each sector and identify key takeaways for stakeholders (see sidebar, “Our research methodology: Sources, scenarios, limitations, and uncertainties”). We find that, while all sectors of the economy are exposed to a net-zero transition, some are more exposed than others. The sectors with the highest degree of exposure directly emit significant quantities of greenhouse gases (for example, the coal and gas power sector) or sell products that emit greenhouse gases (such as the fossil fuel sector). Approximately 20 percent of global GDP is in these sectors. A further 10 percent of GDP is in sectors with high-emissions supply chains, such as construction. Other sectors accounting for about 70 percent of GDP have less pronounced direct exposure. They are nevertheless dependent on the highly exposed sectors, for example through interconnected economic and financial systems, and therefore could be affected by the transition. Below, we describe the economic shifts for some of the most affected sectors. Together they account for about 85 percent of global GHG emissions through their operations or products, and we present our analysis of the economic changes they would likely experience in the Net Zero 2050 scenario. 1 1. We estimate how much exposure these sectors have to the transition by measuring their direct emissions (scope 1 emissions, which indicate exposure to potential demand shifts, investment needs, and cost changes from having to alter production processes), emissions from products (downstream scope 3, which may affect demand, for example, if consumers shift their preferences, and in turn also affect the capital investments made by the sector and its costs), supply chain emissions (upstream scope 3, which may expose the sector to cost shifts as its core inputs are affected by the transition), and emissions from purchased electricity (scope 2 for electricity use, which could indirectly expose the sector to the effects of changes in the world’s energy mix). Fossil fuels. As noted earlier, combustion of fossil fuels produces 83 percent of global CO2 emissions. The sector is seeking to decarbonize  through energy efficiency, electrification, and managing fugitive methane emissions. At the same time, it faces significant demand shifts from potential shifts in the energy mix, with a reduction in demand for fossil fuels and growing demand for other energy sources such as electricity, hydrogen, and biofuels. In the scenario analyzed here, oil and gas production volumes in 2050 would be 55 percent and 70 percent lower, respectively, than today. Coal production for energy use would be nearly eliminated. Under the net-zero transition, demand for jobs within the fossil fuel extraction and production sector could be lower by about nine million direct jobs by 2050. McKinsey research  suggests that oil and gas companies are adapting to the low-carbon transition by becoming resource specialists, transforming into diversified energy players, or turning themselves into low-carbon pure plays. Sidebar Our research methodology: Sources, scenarios, limitations, and uncertainties We assess the net-zero transition along two dimensions: sectors and geographies. For the first, we examine energy and land-use systems that account for about 85 percent of global emissions: power, mobility (in particular, road transportation), industry (steel and cement production), buildings, agriculture and food, and forestry and other land use. We also looked at fossil fuels that supply energy to many of these systems. For the geographic dimension, we analyze effects in depth for 69 countries, which make up about 95 percent of global GDP. We chose not to develop our own transition scenarios and rely instead on widely used scenarios created by other institutions. Specifically, we analyze potential effects under the Net Zero 2050 scenario defined by the Network for Greening the Financial System (NGFS). This hypothetical scenario mirrors global aspirations to cut emissions by about half by 2030 and to net zero by 2050 (exhibit). It reaches net-zero CO2 emissions by 2050 for the economy as a whole; this means there are some low residual gross CO2 emissions in hard-to-abate sectors and some regions that are counterbalanced by CO2 removals. We chose to work with the NGFS scenarios because they cover all major energy and land-use systems in a coherent manner, provide regional granularity, are designed for use in risk and opportunity analysis, and are becoming the standard scenarios used by financial institutions, regulators, and supervisors. Exhibit We strive to provide individuals with disabilities equal access to our website. If you would like information about this content we will be happy to work with you. Please email us at: In some cases, as a counterfactual for comparison, we also use the NGFS Current Policies scenario. This scenario projects the greenhouse gas emissions that would occur if only today’s mitigation policies remain in place (based on an NGFS assessment of policies as of the start of 2020), and it anticipates a little over 3°C of warming by 2100. The comparison allows us to account for how other factors such as GDP growth or population growth could affect the economy between now and 2050. We also collaborated with Vivid Economics to use the two NGFS scenarios to generate more granular sector variables where needed (for example, sales of new automobiles), in a manner that was based on and compliant with the NGFS scenarios. In such cases, we still refer to the specific sector variable as being based on the relevant NGFS scenario. We performed the analysis as follows. First, we used the NGFS scenarios and downscaling by Vivid Economics to quantify changes in important variables in each energy and land-use system (for example, changes in power production by source). The downscaling was done to provide sectoral or technological granularity where not available from NGFS. We used this to assess changes in demand and then assessed the implications for capital stock and investment, producer and consumer costs, and employment based on information about decarbonization technologies and their capital and operating costs, labor intensity, and effects on value chains. Where possible, we used region-specific costs and labor assumptions, as well as expected technology learning curves over time, based on McKinsey analysis. Limitations of our approach and uncertainties. We recognize the limitations of the NGFS scenarios, as with any transition scenario, given that this is an emerging field of research. First, while some variables are explored at the sector level, the scenarios often do not provide enough detail to explore how different types of activities will be affected, thus requiring downscaling to achieve the necessary sectoral granularity. Second, the models underpinning the NGFS scenarios may not capture important dynamics or constraints within a sector. For example, the model we used favors more economy-wide use of biomass in energy and industry (for example, hydrogen production) than may be considered feasible in other sector-specific decarbonization pathways. Third, although the models do capture ongoing learning and technological innovation, they may fail to sufficiently anticipate the emergence of disruptive technologies that may change decarbonization pathways and lower cost trajectories faster than anticipated. Fourth, while some NGFS scenarios have begun to incorporate damages from physical risks in the economic modeling, further work is needed to fully integrate physical risks into the decarbonization pathways. As a result, we have focused here on scenarios that do not incorporate physical risk. This approach also allows us to focus our analysis on the effects of the transition alone. Finally, the scenarios reflect climate policies and technological trends in place before the COVID-19 pandemic and climate negotiations and pledges at COP26 in Glasgow in November 2021. Our analysis largely consists of an analysis of first-order effects. Various uncertainties could influence the magnitude of outcomes highlighted here. While some of these factors could result in lower outcomes than those sized in this research, some factors suggest that additional costs and effects will likely occur as the transition unfolds. By the same token, the costs of physical climate risks could likely prove higher than those described here. Key uncertainties include the following: Warming scenario and emissions pathway. A higher warming scenario (for example, 2.0°C) may lead to smaller transition effects than a 1.5°C warming scenario, given the lower degree of emissions reduction and deviation from today’s production and consumption patterns it entails. Sectors’ decarbonization actions and activity levels. Because the focus of our work is assessing the nature and magnitude of economic shifts and not identifying decarbonization actions, we used a prespecified net-zero scenario from NGFS. It is feasible that an alternate technology mix could result in lower costs and different shifts than those described here, and that further technological innovation could result in a different pathway with lower costs. It is also feasible that the path the world undertakes to decarbonize is different from the one described here. For instance, an alternate scenario may consist of substantially more use of carbon capture and storage (CCS) technologies and a focus on decarbonizing the hydrocarbon value chain. For example, this could happen if capture costs fall, regulatory frameworks are put in place to incentivize CCS use, and markets mature for recycled CO2 as a material feedstock. Magnitude of direct and indirect socioeconomic effects. Some effects could be larger than described here, for example, if executing the transition is more complex than the scenario here suggests, and additional capital spending is needed to maintain flexibility and redundancy in energy systems. If supply of key materials or low emissions of sources of energy do not keep up with demand, this could result in shortages and price increases, which we have not considered in our quantification. Higher-order effects could magnify risks and increase costs, particularly in the short term. For example, depending on how the transition is financed, the effects on the overall economy could be substantially higher than sized here. Finally, effects could also be larger under an abrupt or delayed transition. Economic and societal adjustments needed for the transition. Costs and investments could be higher than sized here, for example to implement social support schemes to aid economic and societal adjustments. Similarly, additional costs may arise from delays, setbacks, and urgently needed adaptation measures, particularly if restricting warming to 1.5°C proves not to be possible. For our analysis, we quantify the scale of first-order effects and describe qualitatively the adjustments needed. Aspects we did not cover. Topics we did not cover include the likelihood, validity, and comparative costs associated with various decarbonization scenarios; the comparative merits of different emissions-reduction technologies; constraints to implement and deploy decarbonization technologies (for example, scaling up supply chains); the actions needed to drive and incentivize decarbonization; quantification of higher-order economic effects of the transition, including on output, growth, value pools, valuations, trade flows, and human well-being: relative costs and merits of decarbonization and adaptation; and impacts that could result from physical climate hazards. We use benchmarks from the external literature and our past research to describe these latter possibilities. As discussed above, our analysis here represents first-order estimates. Fully quantifying the costs of rising physical risks and the transition is complex. It would require estimating impacts from rising physical risks and the cost of adaptation actions, building robust estimates of the impact of the net-zero transition on the economy that takes into account the higher-order effects described above, and doing so over time and while grappling with the various uncertainties described previously. Power. To decarbonize, the global power sector  would need to phase out fossil fuel–based generation and add capacity for low-emissions power to meet the existing additional demand arising from both economic development and the growing electrification of other sectors. It would require substantial annual capital spending from 2021 to 2050, which we estimate at about $1 trillion in power generation, $820 billion in the power grid, and $120 billion in energy storage, in the NGFS Net Zero 2050 scenario. Opportunities would arise not only for power producers but also for providers of equipment, electricity-storage hardware, and related services. Our analysis suggests that by 2050, under a net-zero transition, approximately six million direct jobs could be added in operations and maintenance for renewable power and approximately four million direct jobs could be lost in fossil fuel–based power. The build-out of power infrastructure and the capital spending associated with the net-zero transition could produce as many as 27 million direct jobs in the early years of the transition, and about 16 million direct jobs associated with construction and manufacturing activity in 2050. Asset stranding could be large. Our analysis suggests that about $2.1 trillion of the sector’s capital stock could be stranded by 2050 in the Net Zero 2050 scenario. Eighty percent of this amount is today’s capacity, while 20 percent is capacity that would be built between 2021 and 2050. Mobility. Our analysis of mobility focuses on the road transportation segment, which accounts for about 75 percent of all mobility emissions. Decarbonization would involve replacing ICE vehicles with battery-electric vehicles or vehicles powered by hydrogen fuel cells (exhibit). In the Net Zero 2050 scenario, annual spending would be $3.5 trillion on both vehicles and to build charging and fueling infrastructure between 2021 and 2050. About 13 million direct ICE-related jobs would be lost in the Net Zero 2050 scenario, although some of this loss would be offset by gains of about nine million direct jobs related to EV manufacturing by 2050. The difference between losses and gains is driven in large part by the relatively higher productivity of low-emissions vehicle manufacturing. Exhibit We strive to provide individuals with disabilities equal access to our website. If you would like information about this content we will be happy to work with you. Please email us at: Industry. We focus on two sectors, steel  and cement , that together account for approximately 14 percent of global CO2 emissions and 47 percent of industry’s CO2 emissions. While technology pathways are still emerging, steel and cement production could be decarbonized by installing CCS equipment or switching to processes or fuels—such as hydrogen—that can have zero or low emissions. Production costs in both sectors could increase by more than 30 percent by 2050 compared with today. Buildings. In the net-zero scenario, the buildings sector would decarbonize by improving energy efficiency—for example, through the use of insulation—and by replacing fossil fuel–powered heating and cooking equipment with low-emissions systems. The average annual spending on physical assets between 2020 and 2050 would be $1.7 trillion per year. Decarbonization of buildings could result in a net gain of about half a million direct jobs by 2050 under a climate transition, driven by retrofitting buildings with insulation. The buildings sector’s biggest adjustment during this transition would be managing the up-front capital costs for end consumers to retrofit equipment and aligning incentives among various stakeholders (such as building owners who invest capital and tenants who may see the benefits of reduced operating costs). You’re invited To a McKinsey event on “The net-zero transition: What it would cost, what it could bring” on Tuesday, February 1 Agriculture and food. In the net-zero scenario, agricultural emissions would be reduced as a result of producers deploying GHG-efficient farming practices  and some consumers shifting their diets away from ruminant animals that generate significant quantities of methane. The scenario would also entail an increase in production of energy crops to produce biofuels. As a result of these shifts, the net-zero transition would result in about 34 million direct jobs lost (predominantly due to diminished production of ruminant meat) and 61 million gained (related in large part to increased production of energy crops and poultry) by 2050. This net gain of about 27 million direct jobs due to the transition is about 4 percent of the 720 million or so direct agriculture jobs today. These job shifts need to be considered against a long-standing trend in the agricultural sector of workers shifting to nonfarm work in addition to productivity, population, and income growth. Through 2050, more than $60 billion of annual capital spending would be needed to enable more emissions-efficient farming. Such investment need not all be new funds; repurposing existing subsidies, many of which counteract environmental and climate-change mitigation goals, could cover a substantial amount of this cost. Forestry and land use. Land use primarily contributes to an increase in CO2 emissions today from land clearing and deforestation. Reaching net zero in this scenario would involve halting deforestation  and accelerating efforts to restore forests and other natural environments to serve as a net sink of emissions. Making these changes would require capital spending of $40 billion per year between 2021 and 2050, about 75 percent of which would be spent in the next decade, primarily on acquiring and protecting land. Reducing deforestation would also require managing adjustments to subsistence-level farming activity (a substantial portion of deforestation is driven by expansion of agricultural land). Opportunities for economic gain might come from voluntary carbon markets and industries based on ecosystem services . New energy sectors (hydrogen and biofuels). The expansion of low-emissions energy technologies will create opportunities. Expanding capacity and infrastructure for other low-carbon fuels would require additional capital spending of about $230 billion per year between 2021 and 2050. We estimate that the hydrogen and biofuel sectors would create approximately two million direct jobs by 2050. About the author(s) Mekala Krishnan is a McKinsey Global Institute (MGI) partner in Boston; Hamid Samandari is a McKinsey senior partner in New York; Jonathan Woetzel is a senior partner and MGI director in Shanghai; Sven Smit is a senior partner in Amsterdam and co-chair of MGI; Daniel Pacthod is a senior partner in New York; Dickon Pinner is a senior partner in San Francisco; Tomas Nauclér is a senior partner in Stockholm; Humayun Tai is a senior partner in New York; Annabel Farr is a consultant in Montreal; Weige Wu is a consultant in New York; and Danielle Imperato is a consultant in Brussels. This article was edited by Peter Gumbel, MGI’s editorial director based in the Paris office, and Josh Rosenfield, an executive editor based in New York. Explore a career with us

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